The wealth of nations

[GOD]

Well, The stupidity of nations

As I inadvertently stated my theory today “at work” I thought I’d better document it online before everyone else starts claiming credit…

Essentially we have moved beyond monetarist theory, we are into something new. Basically it revolves around investment products being far greater in volatility and size than the underlying issues with money flows.

One of the key drivers to this has been the immense build up of derivative instruments, some 1000 trillion worth.

The underlying issue that nobody has seems to have grasped is that while instruments can spread risk around and allow the individual company to lever itself more, it does not change the risk and via leverage the whole market becomes more risky. In effect we can get a systemic market failure, in effect the perfect storm.

Derivatives are far greater in value and risk than changes in the money supply. These derivatives have grown exponentially over the last 15 years.

There is also a secondary and more insidious aspect that seems to have appeared, and that revolves around vest party interests where driving down a stock price can achieve a greater profit through the instruments that are also put against it. It’s rigging the market and exploiting the dislocation between intrinsic value and protected positions. The markets are not being driven on value, they are being driven by positions on those assets.

So, we need to go beyond monetary theory and understand derivative theory, its potential impact and flows. I haven't yet heard one economist start really talking about this, they are still wheeling out funds to protect banks and talking keynesian intervention policies....

[GOD]

I'd recommend anyone seriously interested in economics to have a read through Adam Smiths book.

I thought it would be incredibly dry, but reading it and understanding the context of the time is more than fascinating, because basically he goes into everything in absolutely fine detail he provides many pointers that can be used for other theoretical development and/or confirmation of your own theories.

It made me smile when he talked of new metal mines in America and how they were devaluing the currency, which ties into my arguments against so called "Austrian economics" that call themselves "libertarians" and seem to think Ron Paul is the reincarnation of some super hero.. Fact is that while "fiat" money might not be perfect, precious metals as the basis for a currency can be cornered and managed to influence currencies.

Anyway, Adam Smith, a great read

Adam Smith - An Inquiry into the Nature and Causes of the Wealth of Nations - The Adam Smith Institute